Question

Hartwell Corporation completed two bond issuances in 2017 to raise cash in anticipation of constructing a new building sometime in the near future. The 1st bond issuance occurred on January 1, 2017, when Hartwell issued $2,000,000 of 12%, 10-year convertible bonds when the market rate of interest for similar bonds was 10% for an issue price of $2,249,243.20. Interest is paid semiannually on June 30th and December 31st. Each $1,000 bond is convertible into 300 shares of Hartwell Corporation’s, $2 par value common stock. Hartwell uses the effective interest method to amortize the bond premium. On January 1, 2020, $1,000,000 worth of bonds were converted into common stock when the market value of the stock was $9. On December 31, 2021, the remaining bonds were retired by Hartwell, at a price of $1,600,000.

The second bond issuance also occurred on January 1, 2017, when Hartwell Corporation issued $5,000,000 of 6%, 10-year bonds with detachable stock warrants at a price of 102. The bonds pay interest semiannually on June 30th and December 31st. Each $1,000 bond carries 20 warrants. Each warrant allows the holder to buy 1 share of Hartwell Corporation’s $2 par value common stock for $10. Just after the bonds were issued, the bonds were quoted at 98 ex rights and each individual warrant was quoted at $2. On January 1, 2021, (when the stock was trading for $11), 5000 warrants were exercised. Hartwell used the straight-line method of amortizing any premium or discount on these bonds.

Required:

Prepare the journal entry to record the issuance of the 6% bonds issued with detachable stock warrants on January 1, 2017.

Prepare an amortization table for the life of the 6% bonds issued with detachable stock warrants.

Prepare the journal entries for the interest payments made on the 6% bonds issued with detachable stock warrants for 2017.

Prepare the journal entry required on January 1, 2021, when the warrants are exercised.

Answer 1

Requirement 1
Journal entry of issuance of 6% Bonds issued with detachable stock warrants on January 1, 2017:
(When fair value of bond is known)
Proceeds: Bonds with attached warranty($5000,000/$1000 X $1020)		$5,100,000
Less: Fair Value of bond without warrant(@$98)		$4,900,000
	Warrant Value to be recognized in the books	$200,000
	OR,
	($5000,000/$1000 X 20 warrant X $2)= $200,000
Date	Accounting Titles Explanation	Debit	Credit
01-Jan-17	Cash	$5,100,000
	Discount on Bond Payable	$100,000
	Warrant		$200,000	(Fair value of warrant)
	Bond Payable		$5,000,000	(Face value)
	(Being issuance of bond recorded)
Requirement 2
Amortization Value:
	Per year amortization value= $100,000/ 10 years = $10,000 per annum
Requirement 3
Journal entry of interest expenses:
30-Jun-17	Interest Expenses	$150,000		($5000,000 X 6% X 6/12)
	Cash		$150,000
	(Interest expenses recorded
31-Dec-17	Interest Expenses	$150,000		($5000,000 X 6% X 6/12)
	Cash		$150,000
	(Interest expenses recorded
Requirement 4
Journal entry of exercise of warrant:
01-Jan-21	Cash	$50,000		(5000 X 1 X $10)
	Common Stock		$10,000	(5000 X 1 X $2)
	Common Stock-additional-paid-in capital		$40,000	{5000 X 1 X ($10-2)}
	(Being warrant exercised)